Troubled KQ set to exit securities exchange as govt takeover looms
Monday July 06 2020
Struggling national carrier Kenya Airways (KQ) has been suspended from trading on the Nairobi Securities Exchange (NSE). PHOTO | AFP
Troubled Kenyan national carrier, Kenya Airways, has been suspended from trading on the Nairobi Securities Exchange (NSE).
The suspension sets the stage for the loss-making carrier’s exit from the bourse and completion of planned management takeover and eventual buy-out of minority shareholders by the government following publication of the National Management Aviation Bill 2020 late last month.
“Consequently, the company has applied for suspension of trading in its shares and closure of its register until the resolution of its future is determined,” said a statement released by the NSE, Friday.
“The suspension from trading takes effect from July 3, 2020 and will remain in force for a period of three calendar months.”
The carrier is grappling with a negative working capital of Ksh42.15 billion ($400 million). Its net loss for the year 2019 widened to Ksh12.97 billion ($129.7 million) from Ksh7.58 billion ($75.8 million) in 2018.
In May last year the NSE management reinstated the airline as a constituent counter of the NSE 20 Share Index, three years after it was dropped from the list due to financial troubles.
Close to 80,000 small investors whose shareholding was significantly diluted during the initial restructuring plan that saw the government increase its shareholding in KQ to 48.9 per cent from 28.9 per cent in 2017 will have to await a buyout offer from the state.
Company statements show retail investors, excluding the large institutional and individual shareholders who owned 24 per cent of the airline, saw their shareholding diluted to a low of 2.8 per cent after the restructuring.
On the other hand, the 10 banks that own 38.1 per cent of the airline through a special purpose vehicle — KQ Lenders Company — after converting their $165 million debt into equity, are well cushioned after it emerged that the National Treasury guaranteed the value of their shares in case they fell below the amount owed to them by the airline.
“The small investors are going to receive the biggest hit in this compulsory takeover by the government because their shareholding has been significantly diluted. On the other hand, the Treasury and the banks agreed that the government provides a guarantee on the value of their shares so that they don’t fall below the debt they are owed by KQ,” said James Kariuki, an aviation expert and chairman of the China-Dubai Traders Association.
“Banks were forced to take up these shares because the airline did not have money to pay them and that is why this guarantee on the value of their shares was given,” added Mr Kariuki.
KQ’s 2017 financial restructuring resulted in the government controlling 48.9 per cent shareholding while a group of 10 local banks got 38.1 per cent of the shares.
Other shareholders of the national carrier are KLM Royal Dutch Airline (7.8 per cent), employees (2.4 per cent) and other small investors at 2.8 per cent.
The persistent underperformance of the airline that has led to huge losses and loss of market share to rival firms has compelled the government to initiate the process of its nationalisation, with hopes of turning around its dwindling fortunes.
“The takeover follows many years of mismanagement. In a way it is going to help resuscitate the company that is in danger of collapse but it points to a bad culture where people who have ruined and brought down state corporations are left to go free,” said Emmanuel Manyasa, an economist and executive director of Usawa Agenda, a non-governmental organisation.
“The government takeover is a reprieve for KQ for the time being but we don’t know the viability and sustainability of this turnaround plan by the government,” added Dr Manyasa.
On Thursday (July 2) the KQ stock on the NSE rose by 6.39 per cent to Ksh3.83 ($0.03) per share, with analysts attributing the share appreciation to expectations that the government could buy out minority shareholders at a premium.
KQ is technically insolvent, meaning that if it is to be wound up, the equity investors would not get anything. The government will have to inject new capital to turn around the carrier.
Kenya’s parliament approved the nationalisation of the loss-making airline as a way of saving it from bankruptcy.
Under the plan, the government will also create a special purpose vehicle — Aviation Holding Company (AHC) — to manage Kenya’s aviation sector.
The AHC will have four subsidiaries — Kenya Airways, Kenya Airports Authority (KAA), Jomo Kenyatta International Airport (JKIA) and a centralised Aviation Services College — which will be run independently.
“The government has never been good at business and this is demonstrated by the lack of going concern for a number of state-owned enterprises. Kenya Airways is not a national strategic asset, there is no evidence that nationalising it, a move that will mean taxpayers assuming its debts, will improve the company’s financial position,” Callstreet investor relations director, George Bodo, told The EastAfrican in an earlier interview.
The airline is facing a financial crisis that has seen it halt route expansion and embark on a review of the existing ones with a view to abandoning and reducing frequencies on what it considers to be non-profitable flights.